EU passes ‘historic’ agreement on bank supervision

European policymakers yesterday (22 September) reached the end of a long road to overhaul the supervision of the EU's banking sector, as MEPs gave their overwhelming backing to the creation of new financial watchdogs. EURACTIV reports from Strasbourg.

"The agreement on supervision is an historic moment for the evolution of financial regulation in Europe," EU Internal Market Commissioner Michel Barnier told MEPs, thanking them for their support.

A large majority of MEPs wanted the EU watchdogs to have stronger powers and a wider regulatory reach than those they received in yesterday's vote.

The three supervisory bodies – for banks, insurers and markets – and a European Systemic Risk Board had their powers watered down as policymakers tried to secure the agreement of more reluctant countries, like Britain (EURACTIV 03/12/09).

Unfinished business

Belgian Finance Minister Didier Reynders, who has been overseeing the process, was less congratulatory than the commissioner and said the stage was merely set for stricter financial regulation in the future.

Although a new body for market oversight, the European Securities and Markets Authority (ESMA), won the right to oversee credit rating agencies, policymakers will have to await further legislation before it can reach derivatives and the central counter-parties – effectively intermediary banks – that handle derivative contracts.

Commissioner Barnier recently proposed to make trading of derivatives – insurance policies based on the future value of assets like commodities – more transparent and to entrust ESMA with their supervision.

It is unclear whether ESMA's powers will be stretched this far as this proposal will need the backing of MEPs and member states first.

The last word

Much of the debate in creating these watchdogs has focused on whether the EU bodies will supercede the powers of national regulators.

In short, the day-to-day running of banks will rest with the national regulators, whereas the EU body will take over when there is a dispute, an emergency or a breach of EU law.

"The European Supervisory Authorities will be able to address decisions directly to national authorities when they are arbitrating between national authorities involved in a cross-border group, when a national authority is incorrectly applying EU regulations and lastly in an emergency situation declared by the Council," according to a Commission paper.

The paper added that the new bodies will be funded by existing budgets belonging to the committees they are replacing – the Committee of European Banking Supervisors (CEBS), the Committee of European Insurance and Occupational Pensions (CEIOPS) and the Committee of European Securities Regulators (CESR).

In addition, they will at first have over 150 staff and closer to 300 after four years of operation.

The total running cost for the three authorities in 2011 will be €40 million, €2.5 million of which will be funded through industry fees, according to Commission sources.

Positions

"The banking crisis exposed the gaps in financial services supervision in Europe. Our market was interdependent but oversight was purely national. In response I asked Jaques De Larosière to come with a vision which the Commission then turned into concrete proposals with an ambitious timetable," said European Commission PresisdentJosé Manuel Barroso, welcoming the Parliament's backing.

"With this reform Europe is the first region in the world to put in place top-notch supervision that is up to the challenges of the future," Barroso added.

"We have worked so that Europe learns the first important lesson of the crisis, that of the failure of appropriate supervision. Today's supervision is a fundamental moment for the evolution of financial regulation in Europe. It is the foundation which gives credibility to the sectoral initiatives we are taking. These initiatives should allow us to avoid severe crises recurring, to protect citizens who are also taxpayers, and to contribute to fair and sustainable growth," EU Internal Market CommissionerMichel Barnier said in a statement.

Economic and Monetary Affairs CommissionerOlli Rehn added: "Macro-prudential supervision was clearly the weakest link of the pre-crisis framework. The creation of the ESRB is a decisive and innovative step towards a stronger and more stable financial system."

Spanish MEP José ManuelGarcia-Margallo (European People's Party), vice-chairman of the European Parliament's economic and monetary affairs committee, welcomed the adoption of the legislative package, which he said would ensure that "the 'main street' no longer pays for the 'irrational exuberance' of financial entities".

"We need to learn from what has happened so that […] we do not find ourselves as vulnerable as now," García-Margallo said.

German Socialist MEP UdoBullmann,economic affairs spokesman for the S&D group, described the new measures as "the first step towards even stricter rules".

"The S&D group will work with the Council to plug gaps in regulation, particularly as far as hedge funds and private equity, derivatives and short selling are concerned," he pledged.

Green MEP SvenGiegold welcomed the establishment of the new authorities, saying that "Europe-wide regulation is the only viable response to the financial challenges we face and for preventing a return to financial chaos".

Despite opposition from some member states that "refused to acknowledge lessons from the financial crisis," according to Giegold, "the supervisory authorities will be more important than originally foreseen and have real teeth due to the insistence of the EU Parliament".

The Green MEP pledged that the Parliament would continue to fight to ensure that meaningful supervision is provided.

"This deal ensures that cross-border markets can be supervised by cross-border institutions who coordinate the work of national regulators. It provides the markets with a common rule book and greater certainty over the key questions of who will regulate what and where," British Conservative MEP Kay Swinburne said.

"Instead of handing over the keys to the City of London, this deal places it in a kind of European Neighbourhood Watch programme. Peer oversight will provide us all with loudhailer warnings when there are macro systemic or particular risks," Swinburne added.

"The British conservatives have given away the keys to the City of London," said British MEP Godfrey Bloom, a member of the UK Independence Party (UKIP).

In response to more sceptical remarks from British MEPs, Peter Skinner, a British Labour MEP, said: "If you think you can just sit on your island, then you are wrong."

MEP Alyn Smith (Scottish National Party) hailed the approval by MEPs of the financial supervision package: "The Single European Market is the EU's biggest achievement. It has created much prosperity across our 27 states and it is imperative that we regulate that market properly. We needed to update the supervisory architecture and this package takes us a good few steps forward."

The European Fund and Asset Management Association (EFAMA) described the vote as "a major step towards a more effective single market for financial services in the European Union and also provides adequate tools to better protect investors and financial market participants against systemic risks".

EFAMA fully embraced the creation of three strong European Supervisory Authorities with increased competences and welcomed the power given to those authorities to elaborate binding technical standards and to develop a single EU rule book.

"This will help to prevent gold-plating and regulatory arbitrage, and thus reduce legal uncertainties and decrease significantly the huge compliance costs that our members are currently facing when they operate on the securities markets of all 27 EU member states," read an EFAMA statement.

"As managers of UCITS, probably the best example to date of a truly pan-European retail financial product, our members have a very strong interest in an harmonised European supervisory framework with powerful authorities liaising closely with national authorities," said EFAMA Director-General Peter de Proft.

"We therefore strongly welcome the reform of the European Supervisory Architecture, which represents a major step towards an effective single market," de Proft said.

"We look forward to establishing as constructive a relationship with ESMA as we have established with the Committee of European Securities Regulators (CESR). We encourage ESMA to build onthe CESR's good practices of open and transparent consultation of stakeholders and would welcome the creation of a consultative panel specifically dedicated to asset management-related matters," he added.

Background

The financial crisis created the need for better European supervision of financial institutions, which are mainly controlled by national authorities even though the industry is increasingly engaged in cross-border activities.

In June 2009, EU leaders gave the European Commission a mandate to propose a solution for sharing the burden of cross-border banks' future rescue plans (EURACTIV 19/06/09).

The Commission drafted two proposals for financial supervision: a European Systemic Risk Board for macro-prudential supervision (ESRB) and European Supervisory Authorities (ESAs) for micro-prudential supervision.

The ESAs would be divided into three sub-groups to oversee different kinds of financial institution: the European Banking Authority (EBA), the European Securities and Market Authority (ESMA) and the European Insurance and Occupational Pensions Authority (EIOPA).